Unemployment May Not Turn A Corner

The ADP number for jobs lost last month was 532,000. It was better than any month since November but worse than what many analysts had expected. Economists predict the unemployment figures from the government, due tomorrow, for May will show non-farm payrolls fell by 500,000 pushing unemployment to 9.2%.

The market seems to sense relief because the economy is not pushing 600,000 people out of work each month as was the case earlier in the year. There are several reasons to believe that the pause is temporary. The government figure for the May job loss could be 550,000 if the ADP numbers are an indication. Recent news from big companies, states, and municipalities has been worse than expected. The summer may not offer any pause at all in the collapse of the job market.

The latest semi-annual corporate employment trends from Dice Holdings came out this week. The firm’s forecasts were unexpectedly poor. The survey of 1,900 employers and recruiters showed that 31% believed their companies or client’s companies will have layoffs in the next six months. The number was 34% in November. The other salient piece of data from the survey is that starting salaries are down sharply. New employees are losing their power as consumers and are probably more likely to have trouble meeting current debt and mortgage obligations as a result.

It would be a mistake to think that mass layoffs are over. The dealers being closed by GM and Chrysler will put 100,000 people out of work based on the most recent estimates. Not all of those people will lose their jobs in one month, but most will be unemployed by the end of the year. The plant closings and temporary shutdowns by the two bankrupt firms will put tens of thousands more workers on unemployment lines.

The consolidation in the financial services industry is not over. A number of banks still face large losses in the last three quarters of the year. The FDIC clearly expects many more bank failures and probably will have to go to the Treasury to replenish its account. There will continue to be cuts from the large mega-mergers that made some of the country’s biggest banks like WaMu and Wachovia disappear. Citigroup(C) and Bank of America (BAC) still face significant losses from credit card debt and commercial real estate obligations. As units of AIG (AIG) are sold and consolidated with new parent firms, there are certain to be more jobs lost from the total number of people who work at the insurance firm. These estimates leave out all of the regional and local banks that are still fighting an awful credit environment and shrinking loan bases.

The next really large wave of unemployment will probably be due to cuts that the most troubled states and cities face. Oakland County, the second largest county in the state of Michigan, says its property- tax revenue will drop by a third between 2007 and 2011. Other counties in states including Florida, California, and Rhode Island may not face income attrition rates of 33%, but hundreds will have shortfalls in the double digits. States are facing equally bad news across the country. The state revenue in California fell 27% from last year according to comments made by the governor. The State of California has 250,000 employees. Most larges states have well over 100,000 people on the payroll. The jobs losses between municipalities and states between now and the end of the year will clearly be in the tens of thousands.

The part of the unemployment story iceberg that is below water is the trouble at small business. The ADP May job lose number of 532,000 included 200,009 people from businesses with fewer than 50 employees. These firms in general have worse access to credit than their larger counterparts and are more likely to rely on a small customer base. The head of Macroeconomic Advisers, which tracks the ADP data, said “The tight credit market and soft sales continue to accelerate small-business job losses. We don’t see a comeback until sometime in 2010, likely after large and medium-sized companies stage their recoveries.”

Most economists still believe that the average number of jobs lost per month for the balance of the year will be below 500,000. It is worth remembering that seasonally the fourth quarter is typically the worst for job cuts. The retail industry could have another year of relentless cutting if consumer spending does not recover for the holiday season. Retailing trouble could push monthly jobs cuts back above 600,000 a month in October, November, and December adding to layoffs  from other sectors of the economy.

Experts and politicians are saying that the cut in interest rates and the stimulus package are producing hopeful signs for employment. If wishes were horse, all the beggars would ride.

Douglas A. McIntyre